洛克威爾自動化 (ROK) 2007 Q1 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to Mr. Tim Oliver, Rockwell Automation's Vice President and Treasurer. Mr. Oliver, please go ahead.

Tanya, thank you. Good morning and thank you all for joining us for Rockwell Automation's first-quarter 2007 earnings release conference call. Our results were released earlier this morning and have been posted to our website, www.rockwellautomation.com. A webcast of the audio portion of this call and the charts that will be referenced during the call are both available at our website. These will both remain available for the next 30 days. With me today are Keith Nosbusch, our Chairman and CEO, and James Gelly, our CFO. Our agenda for today includes some opening remarks by Keith and then James will walk you through both the quarter and our outlook. We will leave plenty of time at the end of the call to take your questions and again ask that you self limit to two questions to allow broader participation.

We expect the call to last about an hour today. Our opening remarks -- our prepared remarks go a little longer than usual because of the new reporting segments. As is always the case in these calls I need to remind you that our comments today will include statements relating to the expected future results of our Company and are therefore forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from our forecast and projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in our other SEC filings. With that I will turn the call to Keith.

Thanks, Tim. And good morning to everyone who dialed into this morning's call. Let me start by pointing out the obvious. This quarter's income statement looks very different from the one you saw last quarter. Power Systems has gone disc ops, it only shows in one line at the bottom of the P&L. As you all know, we expect to close on our sale of Power Systems exactly one week from today. At that time, we will have completely exited the power conversion business; that is, we will be out of nearly all mechanical and electrical conversion products. Reliance and Dodge are the best of their kind in the world, but they stand in sharp contrast to the kind of business model Rockwell has been evolving, one founded on the key concepts of control and information. This quarter is witness to a very big stair-step in this transformation of Rockwell Automation, something very unusual in the life of a company.

Starting today, people on the outside of Rockwell can now see what's been happening on the inside of the Company for quite some time. And see the ideas that govern almost every aspect of our strategy and resource allocation, a relentless focus on the key concepts of architecture, software, and intelligent motor control. And the evolution of our business model to one focused on ever higher levels of differentiation and customer value add. To be clear, we are a pure play factory automation Company, the largest in the world and determined to be the most valued in the world. Coincident with moving Power Systems to discontinued operations, we are introducing two new reporting segments, Architecture & Software and Control Products & Solutions. If you could please turn to the slides that were posted to the web site with the release this morning. The first slide beyond the disclosure language is a simple visual depiction of the reporting segment structure as it existed prior to this quarter and what it will look like going forward.

In 2006, we had two reporting segments: Control Systems and Power Systems. Beginning in this quarter, we have two new reporting segments: Architecture & Software and Control Products & Solutions. These two previously made-up Control Systems. For those of you familiar with our prior nomenclature, Architecture & Software is essentially the old ASIG business. Control Products includes the C/PEG unit, the services and solution businesses from GMS, and the [drives] business we retained from Power System. Slide two depicts the breadth of Architecture & Software and introduces the concept of the connected enterprise. This segment contains all of the elements of the integrated control and information architecture capable of connecting the customers entire manufacturing enterprise. Increasingly, factories are being integrated with the supply chain, distribution, and business systems. We refer to this as "connecting the enterprise." A connected enterprise must also ensure safety of all personnel and assets, as well as enforce enterprise live data security.

A major driver in industrial automation today is increasing productivity while driving down the total cost of ownership. The proliferation of microprocessors connected over ethernet in a factory is providing large amounts of data. This data, when complemented with modern software, can enable significantly higher productivity. Driving global productivity and managing manufacturing business risk requires realtime access to the data and performance of machines, lines, factories, and the enterprise. Rockwell Automation Solutions are built upon an integrated architecture that is based on open standards and enables a connected enterprise. Our successful Logix architecture provides world-leading integrated control today, and it is well-positioned to become an information server for the factory. Our MES Solution integrates multiple production disciplines such as production management and asset management. We also provide integrated enterprise visualization which will allow customers to collect metrics and display dashboards.

This chart shows the product offering of Architecture & Software and how it meets this challenge, from control and information platforms and software to bundled automation products such as motion, sensing, and safety products. A connected enterprise is an important concept that deserves a much longer and more detailed description than I can walk through with you today, and we will certainly come back to it as the year goes on. Turning to slide three, as you can see, Architecture & Software has performed well over the past five years with an 11% compounded annual growth rate. Some of the drivers of that growth and future growth are leading edge technologies, expanding our addressable market into processed safety and information applications, and enhancing our market access, such as with OEMs and verticals. Architecture & Software also generates the highest returns on invested capital in the Company, because it is heavily weighted in favor of intellectual capital, not physical.

This segment is the repository of more than $0.5 billion of internal engineering investment and hundreds of man years of intellectual capital over the past ten years alone. All of it focused on building the most valued portfolio of differentiated technology platforms. We have been investing heavily in this segment to fuel and accelerate growth. That's because with returns like these, organic growth is an extraordinarily powerful engine of share owner value creation. Moving to Control Products & Solutions on slide four, you can see that this segment encompasses a comprehensive portfolio of intelligent motor control and industrial control products, along with the customer support and application knowledge necessary to implement an automation or information solution on the plant floor. Each category of products and services have their own differentiators that enable profitable growth. In Control Products it's product performance and integration with Logix. In Solutions and services, it is all about domain expertise and global capabilities.

Turning to slide five, Control Products & Solutions has also performed very well over the past five years as evidenced by a 10% compound annual growth rate. Some of the growth drivers in this segment are our ability to leverage the integrated architecture, our ability to globally deploy our customers' processes, and increasingly, our customers' desire to outsource certain capabilities. Our Control Products & Solutions business also has strong returns. Maybe not as high as its sister segment, but well above our cost of capital. That is because of strong market positions, intense productivity, and continuous -- and continuous improvement initiatives and a disciplined approach over the years to allocating investment capital. We continue to put our dollars only where we believe we can successfully differentiate our products and avoid commoditization. Now let me shift gears and comment on our results this quarter. They were solid. EPS was well within our targeted range.

We got to this result in a slightly different fashion than prior quarters. We had somewhat less than expected revenue this quarter, which James will discuss in detail in just a minute. And we had better than usual productivity and we think this is sustainable. As an organization, we are becoming increasingly proficient at sustained, continuous improvement. We have a great business model at Rockwell, a model that affords us a significant number of diverse, organic growth opportunities and the means to have already fully funded many of them. As a Company, we have reinvested a significant amount of money toward these opportunities. You will see the impact of those investments when you look at our Architecture & Software margins. From this position of strength, with this great business model, Rockwell can generate good results even if execution is mixed in any one period. And our results this quarter indicate that execution was not uniformly strong.

While we have steadily improving our ability to grow in emerging economies, I am very dissatisfied with our Asia growth rate. We have not executed as well there as we have in Europe, where we have a more experienced local leadership and quite frankly better infrastructure. We have started to get some traction in the consumer facing industries where we funded vertical teams, but we have taken longer to get those teams up, running and effectively selling. I am also not satisfied with the growth rate in our Logix's integrated control and information platform. While there is a direct connection between slower Asia growth and the rate of growth at Logix, we are taking aggressive measures to fuel more growth in every region, in every set of customers, and in every channel. We believe a relentless focus on execution will produce incremental benefits during the balance of 2007. Let me add a word about our 2007 guidance.

As you remember, in October we provided preliminary guidance for 2007. Preliminary, because we were still sizing up the dilutive impact of the Power Systems divestiture. As I told you last quarter, we were not happy about making a dilutive divestiture, even if it was 20% our revenue base. And I am pleased to report that a very successful effort to reduce structural cost has generated sufficient savings to effectively offset the remaining dilution. Assuming that we do execute these well-planned cost actions and considering recent feedback from our sales pipeline, we are reaffirming our revenue and EPS guidance for this fiscal year. Now James will walk you through a more detailed review of our quarter and our outlook. James?

Thanks, Keith. I'll start with slide six, which is entitled "Revenue by quarter 2004 through first quarter of '07." Having had Keith just introduce the two new reporting segments, let me spend a minute -- a little more detail on the history of the past three years. This will be high-level information, but Tim will post a comprehensive dataset for the new continuing ops Rockwell on our website shortly after the call. That will help you hopefully with your models. This slide shows revenue for the two new reporting segments for the most recent 13 quarters. As you can see, both segments have had a steady upward trend in revenue over the past three years, about an 11%, 12% compound growth rate. In the past year or so, the slope of the blue line, that is the Control Product & Solution segment, has been a percentage point or two steeper than the red line, which is Architecture & Software, and that's due to the strong demand in resource-based industries we have been talking about. You can also see, by the way, that the source of our typical first-quarter seasonality is stemming from the Control Product & Solution segment.

You go to the next chart, which shows margin rates for the two new segments, there you can see that both businesses have significantly improved margin over the periods shown. This improvement is evidence of strong operating leverage, plus favorable price and the strong productivity discipline that Keith mentioned. Looking at the red line at the Architecture & Software segment, among other things you can see that our most recent quarter had the second highest margins we have ever had, and that is compared with a particularly rich mix in the year ago quarter. At Control Product & Solution, the blue line, the pattern has been steady, maybe a little sawtooth, but its steady improvement from mid single-digit margins to mid-teens in the most recent periods. As I said earlier, Tim will be providing all of the data later today and he will be happy to go through the details with you at that point. Let me turn now to slide eight, entitled "2006 sales by region" that summarizes the geographic breakdown of the two segments. On the left you can see that Architecture & Software is the more global of the two from a revenue perspective, with over 40% of revenue outside the U.S. and Canada.

Looking at the bottom of the chart, for fiscal 2006, 43% of total Rockwell sales were outside the United States, and that figure is closer to 45% in the first quarter of '07. Let me switch gears now, go to the next slide, number nine, and talk about first-quarter results which compares key items from the income statement with last year's first quarter. I should note at this point, again, that this information has been restated to reflect the Power Systems business as a discontinued operations. So Power Systems has been collapsed into the single line close to the bottom of the chart. Starting at the top, revenue in the quarter was $1.146 billion, an increase of 7% over 2006. Segment earnings were $227 million, up 7%. Conversion was 20%. No expansion in margins from last year's 20%. And, of course, below our targeted range of 30% to 40%. And I will talk more about that in a minute. Walking down the page, you will notice that General Corporate net was $19 million, down about $3 million from last year.

Going forward, you should plan for about $23 million of pro forma general Corporate net expense per quarter, which is up from the current run rate, and that's due to some retained costs associated with the divest in Power Systems business. However, I should point out that this line will also include interest income on the divestiture proceeds. As Keith mentioned, a week from today we have scheduled the closing and would be in receipt of the $1.8 billion of proceeds, of which $1.75 will be in cash. So this General Corporate net line could be netted down by a good bit and considerably below $23 million for as long as we have the divestiture proceeds in the form of cash on the balance sheet. Moving down the page, interest expense is up due to higher debt balances and higher interest rates. We see our 10Q, it will show that we had about $530 million in outstanding commercial paper at the end of the quarter, and that's up from our fiscal fourth quarter due to share repurchases that we made in anticipation of the divestiture happening. Looking at income taxes, when you do the math, you will calculate a first quarter effective tax rate of about 30%, which is up a point from last year.

To repeat the message that you've heard from us for the last year, there will be a number of minor tax events and the actual rate in any one quarter could jump around a little bit, but you should use 30 to 31% -- 30 to 31% rate for us for the balance of 2007. Going down to the diluted EPS from continuing ops, that was $0.76 compared to $0.68 in the year ago quarter, which was up 12% year-over-year. Let me turn now to -- to reported EPS, which includes discontinued operation. This line includes about $0.20 of EPS from Power Systems for the quarter, but also a tax benefit of $1.54 a share. This benefit relates to the differences between the tax and book bases of Power Systems. In round dollars it was $264 million. In addition to this tax benefit, we will be obviously recording an even larger gain in the second quarter when the transaction closes. All told, the net aftertax gains on this transaction could exceed $900 million. Just for the record, reported diluted EPS, excluding the large tax benefit of $1.54, leaves $0.96 in the quarter and that compares with $0.80 in the year ago quarter. Right across the bottom you can see average shares outstanding in the quarter were 171.4 million, down 6% from a year ago.

During the quarter we repurchased 5.6 million shares. Let me move now to the next chart entitled "Q1 results, Rockwell Automation continuing operations". As we always do we show Rockwell total results over the past five quarters, but this time excluding the Power Systems results. As I said before, organic growth was 7% year-over-year or 5% excluding the effects of currency translation. Sales were down 4% sequentially. From a regional perspective, growth was led by strong performances in Europe and Latin America. Operating margins in the quarter were flat with the first quarter of last year at 19.8%. You can't see it on the chart, but our trailing four quarter return on invested capital was 22%, up nearly 3 percentage points versus the year ago period.

I would like to go to the next chart which summarizes our Architecture & Software results using our customary format. In this segment sales were up 6% year-over-year. On a sequential basis, sales were flat. Logix sales were 11% in the quarter, continuing the below-target growth of the past couple of quarters. Legacy PLC sales were down about 15% in the quarter, but, remember, that Logix is now about twice the size of the Legacy PLC business. Like the second half of our fiscal 2006, these numbers were significantly affected by the automotive downdraft among the traditional Detroit-based customers. As we have said for three straight quarters, we will just have to live through these tough comparisons and we think we've got one more quarter to go. Operating margin declined a little over a point to 27.8%. Operating earnings benefited from a combination of higher volume, productivity, positive price, lower pension expense, all of which were nearly offset by inflation, higher spending on growth initiatives, and a leaner product mix.

Let me turn to slide 12 which covers our Control Products & Solutions segment. Sales were up 8% year-over-year, but down over 7% sequentially. As I mentioned earlier, this segment has a pretty clear seasonal pattern with a strong fourth followed by a sharply lower first quarter. With that, margins expanded more than a point year-over-year to 12.9%. Operating earnings benefited from productivity, higher volume, lower pension expense, and favorable price, which were partially offset by inflation and some product mix. Let me turn now to the next chart entitled "Power Systems, discontinued operations." Sales were up 11% year-over-year driven by continued strong demand in their end markets. As you can see on the right, operating earnings were up 45% to $53.2 million; however, this does include a $5.7 million depreciation benefit related to the pending sale. Basically since the business is classified as a discontinued operation, the assets are no longer depreciated. Excluding that benefit, operating earnings were up about 30% to about $47.5 million. These are great businesses and we think combined with Baldor's strong position, the new Company is going to be a very well positioned industry leader.

Let me turn now to the geographic breakdown of our sales in the quarter. This chart provides regional growth rates and I would ask you to look at the far right column, which shows organic growth excluding the impact of currency translation. As you can see we had a strong global mix of sales in the quarter. Latin American sales were up 16% with continuing strong performance. Our Europe sales were up about 15% in the quarter. A good result in continuing the progress we have seen in the last few quarters. We are optimistic that we will see continued momentum in Europe and getting help from the short-term economic factors there, as well as the benefits of the heavy growth investments we have made in the region. Asia-Pacific sales were up 5%. Once again our Asia results are the average of emerging Asia and the slower growth developed Asia. However, in this quarter, growth in China was in the mid single-digits, minus currency. As Keith said, we have got to be direct and to the point in addressing the execution issues that might be holding us back in China. Canada sales were down 5%.

This performance is a reflection of the strong Canadian dollar and the affect that it is having on the industrial states there, as well as the known weakness in automotive and forest products end markets after the housing bubble burst. Looking at the U.S., which at 55% of our sales has a big impact on our average growth rate, we think right now we are getting through some particularly tough year-over-year comparisons. And we are hearing some positive signs about improving distributor and customer activity levels over the next couple of quarters. Let me turn now to cash flow, chart 15. We had $92 million of free cash flow in the first quarter and that is a bit lower than our normal first quarter cash flow, which is seasonably below 100% of net income. And as you can see the primary use of cash was working capital, which used up $88 million of cash. Capital spending was about equal to depreciation and amortization. I just wanted to say that for the full year we still expect to generate free cash flow about equal to net income.

We move to chart 16, which is a repeat of our 2007 headwind/tailwinds chart which we used last quarter but with one or two minor changes. In looking at the upper left at revenue headwinds, while we clearly expect growth to continue, we have also clearly been in a moderate deceleration in the U.S. industrial states for the past six months. As I mentioned earlier, we are picking up some indications that this headwind could abate as we progress through the fiscal 2007. Weakness is expected to continue in the traditional Great Lakes North American automotive states, at least for one more quarter. There will be continuing challenges in developed Asia and of course we have got to work through the revenue plateau that we might have hit in China. As you have seen over the past six months, we have experienced slower growth in our integrated architecture platform. Looking at the lower left of the chart at earnings headwinds, inflation will continue to affect our earnings. We expect a positive but somewhat less favorable price/cost dynamic in '07. And, of course, we are just working our way through the last of the hard comparisons from the growth investment that we made in 2005-2006.

Finally, we have had to deal with the pro forma earnings dilution that results from the Power Systems sale. Going to the upper right to revenue tailwinds. As I mentioned earlier we expect our revenue momentum in Europe, Middle East and Africa to continue. We also expect to see the top-line benefits from our expanded market presence including continuing growth in emerging markets. This is all part of our relentless focus on executing the growth investments that we fully funded over the past two years. Looking at earnings tailwinds. Earnings will benefit as we continue to drive cost productivity across the enterprise. And as we have described in the past, 2007 will also benefit from lower pension and retiree expenses. Volume growth will continue to drive operating leverage. EPS will benefit from a lower share count.

Lastly, we've taken aggressive structural cost reduction actions to offset the dilution from the Power Systems sale. This was accomplished through a very broad-based use of Six Sigma tools across our fixed cost structure. Taken together with a tapering off of any incremental growth investments, we believe we will be facing much more favorable cost structure comparisons going into the rest of 2007. Moving into the homestretch here, let me go to chart 17 which reaffirms our 2007 guidance. Let me start by repeating what Keith said earlier, the preliminary guidance we gave last quarter was called preliminary because we were still assessing the impact of the Power Systems sale. Since that time we have executed the structural cost reduction, as I just mentioned. With the transaction set to close next week and after a lot of hard work by a large number of people, we are reaffirming our October guidance, but this time incorporating the pro forma impact of the Power Systems sale. Full-year revenue growth we believe will be 7% to 8%.

We expect both segments, Architecture & Software and Control Products & Solutions, growth to be in this range. We expect conversion margins, that is incremental operating earnings divided by incremental sales, to be in our targeted 30% to 40% range. As I mentioned earlier, we are working through to a more favorable cost structure as we enter -- as we enter the rest of 2007. So, reported diluted EPS of between $3.70 and $3.90. But this, obviously, excludes any gain or anything on the sale of Power Systems. Free cash flow, as I said, to approximate net income. So all in all we are looking forward to another good year in 2007.

And finally, our last chart, which is entitled "2007 guidance EPS walk." Understanding that there are a lot of moving parts this year, this last waterfall slide, it takes what is included in our $3.70 and $3.90 guidance and what is not. What is included shown on the left are the earnings from our continuing operations for the year, a range of $3.45 to $3.65 per share. Plus in the next column to the right in green, about $0.25 a share from the four months of Power Systems discontinued operations that we will have. And that gets you to the center column, our guidance of $3.70 to $3.90 per share. Moving to the right, what is not included. First, the $1.54 per share tax benefit recorded this quarter and finally to the far right, whatever the gain is on the sale that we will report next quarter. So hopefully that was helpful. I know this has been a lot of talk on our part, so thanks for your patience and we'd be happy now to answer any questions that you might have.

Tanya, we're ready to take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Bob Cornell of Lehman Brothers. Please proceed.

Yes, good morning, everybody.

Good morning, Bob.

Let me start with a couple of big-picture questions. First of all, what are those positive signs you are talking about in the U.S. and maybe you could just give us a broader view of what the sort of business pipeline looks in the U.S. and then generally.

Bob, I think with the U.S. outlook, what we are seeing is continued investment in the -- in the heavy industries and that is not abating going forward. And we are seeing renewed investment in a lot of the logic-heavy content, consumer-facing industries, consumer products types of industries where they are generating more productivity driven expenditures, and I would say that combination as we look at the pipeline with -- with discussions with our distributors and in particular the western region of our -- of our selling organization and the South in particular. That is where we are seeing the -- the continued and renewed interest in -- in projects and productivity rated, productivity driven investments with, once again, the only weakness area being in the Great Lakes in the automotive supply chain sector. I would also comment that it appears like we are starting to see the previous investments, in particular in the OEM segments, starting to work their way through that they are bringing new machines and new opportunities that are now being able to get through their organizations and so we see, I would say, an uptick in the OEM segment for the remainder of the year as well.

Two other questions, Keith. One is, again, you guys said the auto weakness it would last one more quarter. I think you've said that now in prior conference calls. Why is it one more quarter and not more than that?

Well, let me tell you why. Because the comparisons all of a sudden become equal. If you remember, when we started in the third quarter, we said it was 50% reduction.

Right.

We said in the fourth quarter a 50%. Well, it is starting to moderate. It was only 30% this quarter. And we expect it to be 30% next quarter. And then we are at the current run rate. So we feel pretty confident that it does have one more quarter to go. Then it will flatten out with potentially some very slight uptick towards the end of the year when some new projects appear to be on the horizon. So I think we have correctly characterized it at this point in time and understand the dynamics behind it based upon the analysis that we've done with our sales organization and with -- and with the Detroit-based customers. So that -- that is why we are predicting what we are there.

Sorry, one more question from me. Maybe you can just go into a little more detail of why you are on this China plateau and what actions you are taking to get that whole market growing again as your second biggest Logix market?

Yes, a real good question. I mean, quite candidly, I think we are there simply because of the rapid growth that we have had and the addition of new resources that -- that are coming on stream, and it is just not fluid, if you will. We have a very immature organization there. We have a lot of new people. We are selling new technology to new customers in a new geography, a very immature distribution channel. And I think what we've done is to really contrast the success that we've had in Europe with the situation in Asia and in particular in China. And what we've learned, and what we need to fix, is the -- is the simple fact that we have more presence, better distribution and a more experienced, mature selling organization and infrastructure in Europe. So out of that, what we've taken is that we've -- that we've had to change and add some leaders. We are performing a very granular analysis by office, by region inside China which is very similar, quite frankly, to what we did in Europe when we started that process.

And we have a -- a much more disciplined selling model, account planning that we are driving there as well. And so I would say that the learning has been that selling new technologies or capabilities to new customers with less mature channels and organizations have a longer lead time and quite candidly sometimes it is over -- it is over two years. So we are very clearly -- we very clearly understand that we have to get it right in China. We understand that that will be the manufacturing focus for the world going forward. And we are committed to do whatever it takes to get it right in China. But, I would say right now we are suffering from the maturity of -- of the organization and the fact that we put a lot of resources there and now we have to make sure that -- that we have the infrastructure, the discipline, and quite candidly in some cases the leadership to -- to get -- to get the benefits of it. So we are very focused on it. I have biweekly meetings with the leadership team in China and with Asia and I just conclude by saying I am confident we are going to get it right there.

Okay. Thanks very much, you guys.

Yes, thanks.

Your next question comes from the line of Mr. John Baliotti from FTN Midwest Securities, please proceed.

Morning.

Good morning, John.

James, just on the conversion margins you showed your goal for the year is 30% to 40%. You made some comments about the first quarter. I am wondering can you walk us through how you see that progressing for the balance of the year?

Yes, John, basically we have a heavy set of investments that we have made and now you know where. It is in the Architecture & Software reporting segment. So what they have been spending money on are putting their business in a more global setting. So we literally are doubling up on expenses to build a Singapore-based business center that didn't really exist a year, a year and a half ago. We're spending money on accelerating the, call it the layer between the factory and the enterprise. There is a lot of work going on in software. But these are investments that were committed to and made and that we're coming up on, call it the more than the one year anniversary of the -- of the decision to make them and now we are peaking out and the comparison, so to speak, the year-over-years kind of level out from here.

Absent those influences, you can easily see conversion margins, because of what we are selling in the Architecture & Software segment, easily see that the incremental margins are a lot higher than -- they are a hell of a lot higher than 20%. We are leveling out on the investments we are making in the SAP here. That should be, if anything, a mild positive as we get into the second half of '07. You know, productivity. If you look at where both segments, but in particular Architecture & Software are going, the number of lean fixing by black belt is doubling and then partially doubling again. Those people are getting up to speed on their sets of projects. So there are a lot -- there are a lot of factors, but basically I would say, number one, the contribution margin on incremental dollar revenue in the Architecture & Software is significantly above the segment average once you get through the kind of the investments to in effect double up their cost structure in Asia and we won't be feeling that too much in the second half of '07.

Okay. Maybe now with -- as we look at the Company ex Power, could you give us a sense of how the -- I don't think you can give us a breakdown of end market waiting, but maybe some color on how the various end markets like pharmaceutical, pulp and paper, life sciences and so on. Maybe kind of a quick walk through of how you saw those this quarter?

Sure, I will be happy to, John. Automotive was basically down 1% globally, but as we mentioned with Bob's question, much more significantly in the Detroit-based market. Consumer facing verticals were in-line with our expectations, mid to high single-digit growth except life sciences which, again, quite frankly, were up more than 20%. The resource-based end markets, oil and gas, mining, aggregate and cement grew above the Company average but at slower year-over-year growth rates, mainly due to difficult comparisons that were driven, if you remember, a year ago we talked about the accelerated spending that happened in the Gulf Coast region, in particularly post Katrina.

Right.

We saw a good slug of investment in the first quarter that was not repeated obviously this year. And then also in Canada, it was a very strong first quarter last year with oil/sand investments that once again was not duplicated in this quarter. They are still great investments, great opportunities up there, but it's a timing issue more than anything else and it was a tough comparison. That is a little picture over the -- over the -- over the verticals and quite frankly to your point about removing Power Systems, that reduces the percentage of resource-based cyclicals as a percent of the total RA and really almost all of -- of Power Systems was driven by the resource-based initiatives and they were lighter were in the consumer-facing -- consumer-facing industries and verticals. So you'll see less of a -- less of a percentage of our business after Power Systems in the -- in the more cyclical resource-based industries going forward.

Okay, great, thank you.

Thanks, John

Your next question comes from the line of Mark Koznarek of Cleveland Research. Please proceed.

Hi, good morning.

Good morning, Mark.

A question -- I got on just a little bit late and I apologize if you mentioned this already, but is there a number of shares that you are expecting that underpin the full year earnings per share guidance?

Yes, the way we modeled the guidance, basically you earn interest income and you have the average number of shares that you basically will see in the next quarter in place. We -- we got -- we've got to go back to the board. We have run through about 12 million share repurchase authorization, there was one for nine and another for three. By the time the deal closes I think we are pretty much exhausted on the 12. e will go back to the board and ask for some more authorization, so I don't want to tell you in advance of what they have approved us to do, but our guidance is basically take the interest income, use the number of shares that we're exiting, call it Q2 with and that's how we figure the numbers. But obviously we don't want to sit around with $2 billion or $1.5 billion of cash sitting on the balance sheet, nor is our guidance predicated on a super, rapid share repurchase.

So if we were to assume a more aggressive share repurchase, that would affect the calculated earnings per share in the guidance?

Yes, any -- anything we buy at this price is comfortably accretive, that's correct.

Okay. All right, good. Then question on the business, which would be the outlook, 7% to 8% top-line for the two segments of the business. Could you cut that geographically for us? What your expectations are for the year?

Yes, first of all, when we built the plan for this year, it looks an awful like what the guidance that I am currently giving you is. So what we said was within the 7 to 8, you would have twice the growth outside the United States, kind of the North American market, that you would have inside. So Latin America it continues along in the mid-teens. Europe continues along in the mid-teens. If you take the U.S. and Canada, it is probably in the low to mid single-digits and you will get approximately twice that in the non-U.S. part of the revenue base.

Then what is the expectation for Asia? Do you expect to make progress during the course of the year or is this going to be something that is a protracted fix?

I'm going to say that basically it is going to take us a little while to work through. The things that Keith talked about are not maturity of organizations, cycle time to get sales force up and effective, better blocking and tackling from a sales management standpoint. We have put a lot of people in over there and I would say probably it's fair to say Asia you should not model -- it is 10 percentage point of the total and therefore I am not sure your model will be that sensitive, but I would probably leave it in the mid, single-digits until we give you further -- further guidance. We think it's of enormous strategic significance but it is 10% right now of the revenue base. It needs to be a lot higher so I would leave it kind of where it is.

Very good, James, thank you.

Thank you.

Your next question comes from the line of Steve Tusa of JP Morgan. Please proceed.

Hi, good morning.

Good morning, Steve.

I just had a question on the -- on the conversion margin. You guys did a better conversion margin last quarter when growth was somewhat slower. Should we be prepared for another similar type of number in the second quarter? I know you are guiding 30 to 40 for the whole year, but I guess that ramps throughout the year. How should we expect the second quarter to play out?

You put your finger on it. It -- we are going to go through into an easier cost structure, set of comparisons. It is not a stair-step, but it will, I would think, consistently improve throughout the year. So there is not a miracle I don't think in the second quarter, but it should -- should look and feel better and as we get into the second half of the year, further improvement beyond that.

So that number is around 20% or below in the second quarter? That would be somewhat of a disappointment relative to your expectations?

I think that is fair to say, yes.

Okay --

Hard to get to 30 to 40 if I have two quarters in a row at 20. It would look like a -- . We are looking for steady improvement.

Right. I think it's tough to get to 30 to 40 with the first quarter but we will see what you guys do. As far as the share count is concerned, so that -- that continuing ops guidance essentially strips out Power but doesn't give you much benefit for the cash deployment is basically what you guys are saying. The continuing ops of the $3.45 to $3.65.

Yes, so the way the model is constructed it is basically interest income, the same share count, and kind of good 7% to 8% top-line, 30% to 40% conversion, but no large-scale share repurchase with the proceeds in that guidance.

And then lastly, what gives you guys the confidence that this thing comes back in the second half outside of auto, because we've heard from other companies that this quarter was incrementally within expected, really across the U.S. industrial landscape. Call it an inventory correction or whatever it is. You said you have talked to your sales force. Is there anything outside of auto that worries you? And I am just kind of curious outside of automotive what you guys are seeing.

Well, I think, first of all, a lot of work went into the pulsing of the organization globally and in particular in the United States. So what do you do? You get in tough with the leadership. They get in touch with the regions. The regions get in touch with the districts. People pulse it up and down the line. I think this is something that we are pretty good at. What I would describe is our pipeline, our visibility starts with an engineering study or quotation activity that is going on and we are never that great on the exact moment when that turns into an order, but you can see in a funnel, so to speak, people moving around. People asking questions. Studies being done. And I think what the sales force is telling us, and they have done this before and they have been pretty good at it, that you don't see the kind of interest level, activity level without seeing at some point a better, this is not saying that we are predicting a doubling in the growth rate, what we are saying is we have been very sensitive to the direction from here of where the activity level in the United States is going.

What they are saying is, it's certainly better than you have seen. You had very tough comparison in the first quarter of '06. A year ago was as strong a quarter we have seen in anytime and in particular it had all good mix. We've lived through this, what I'll call a -- well, a little bit of a slowdown in the last six months and what they are saying is on the margin from here, you get a little bit more wind in the sails. And you could be -- we could be more specific, but it is fair to say -- Keith talked about it in the West from Texas all the way to Seattle through the Rockies, there is nothing wrong with the basic industry resource mining, resource intensive aggregate, cement, and we are seeing a better uptake, a better interest level in the architecture intensive and in the kind of consumer-facing part of the business. And that partly is due to the arms and legs and our work in focusing people more intensely on Architecture & Software-led customers than activity.

Okay, great. So I -- sorry, on that front, so book-to-bill in Logix in the quarter, is that a reasonable way to look at that business? Is that around one and a quarter? How do we think about that?

I never -- let me remind you that this is a book-and-ship business, so I don't have a -- well, Logix ships out in the same period that it --that it books. So what we are really saying is, and we have had to go and work this, is there is a front log. Not a backlog, it's a front log. What does that mean? What are the opportunities that the sales engineers are working on? We have a customer relationship management system. They enter the opportunities in the system and we spent a lot of time pouring over what are the opportunities. It's not an order. It is a study. It is a quote. It's a level of activity that goes on as a precursor to an order, because when you have the book-and-ship nature of this business you better get good at that.

Yes. Okay, thanks a lot.

Thank you.

Your next question comes from the line of Jeff Sprague of Citigroup. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

I guess, first, just on the issue of kind of the cost. This -- this discussion of structural costs, James or Keith, I don't think you are including that in the discussion of kind of investment spending tapering off. Correct me if I'm wrong. But can you give us an idea of what the structural costs are? What type of reductions is imbedded in your guidance?

Yes, well, first of all -- no, the structural cost reduction is knowing that we were going to divest 20 percentage points of revenue starting some time ago. The Company started looking at it, I will call it root and branch. Every aspect of overhead, in particular we have been focusing on stuff that customers don't know about and care about. So call it general and administrative back office staffs and functions. And what we've really done is driven a, I'll call it a very healthy level of re-examination of what is needed. And we started on it long enough ago that we have been able to incorporate it first in our AOP and then secondly well above any level that we planned in our AOP through another wave of structural cost production. You know what the numbers are. We thought we would have some -- what is it, Tim, $0.05 a share -- so you can work out the scale of the numbers we are talking about. It is a good $50 million, $60 million, $70 million worth of overhead, which for us is a point, point and a half of overall margin. And that is the kind of -- that's the kind of structure that we are talking about.

And is that work largely done at this point? Or is that -- is that still unfolding over the course of '07.

It's done. We have to follow through. In other words, everyone has got the actions taken. Some of that involved census reduction. Certainly a lot of it involved right-sizing people's ideas about what their budget should be and making sure that that happens. Like everything else you have got to keep after it but, yes, it's largely -- any accruals for severance have already been taken, and now we just need to operate through whatever it is we've planned and said we are going to do.

And what is the -- what is the impact of pension in the segments versus pension going through Corporate? I mean, what kind of basis point improvement year-over-year is going through the segments on pension?

I am going to say that, what is it, maybe two-thirds or three quarters of the pension benefit runs through the segments and the benefit was some -- in overall terms, what, $50 -- $50 million something like that for the year.

$50 million for the full year. $12 million in a quarter and about 65% would be in the -- in the Control Systems unit, which would be split, therefore, between the two new segments.

Okay. And then the issue of growth and execution in Asia, Keith. Is it solely a China issue? Or is there just a larger Asia kind of growth infrastructure aspect to the question here?

It is a larger issue than just China. The infrastructure is more of a comment in the developing regions. So it would be the infrastructure in China, the infrastructure in southeast Asia, the infrastructure in India. But we also have to manage the developed countries and regions as well. We've had some new leadership changes in those areas. But it's -- it's just a continued maturity process in a -- in a new area for Rockwell Automation, with -- with new customers, new technology, and so we're -- we have a pretty -- pretty strong focus on -- on what we need to do there. And really it was -- when you look at the growth rates we've had, the last two years they have been very strong and then starting to taper off.

So that tapering is what's telling us that we need to be able to anticipate the doubling of our business in -- in Asia over the next couple of years, and making sure that we have the organizational design to be able to accommodate that. And I think our growth, quite candidly, probably overtook some of our capabilities in the region and that's what we are intensely focused on now is to -- is to do a better job in -- in anticipating where we want to go, where we want to be, and making sure that we have the -- the leadership, the infrastructure, the tools, and the talent to -- to get us there. And as I said earlier, I am confident we are going to get through that, because as a automation company, we have to be -- we have to be in Asia and we have to be successful throughout that region.

I guess my follow-up question to that would be is how well can you measure it as an execution issue? In other words, is there clear demonstrable share loss to people you don't want to be losing share to? Or is it clear that -- that the markets are running much stronger than the revenues you are reporting, and, therefore, you are not keeping up or is there still kind of a question about just the overall tone of demand? Is there some slowing rippling through that region, something that obviously people have kind of had their antenna up for?

Yes. I -- I would say we are not seeing a significant reduction in the opportunities in Asia. So I would say we are not seeing a slowing in the -- in the need for automation and or our products in the region whatsoever. Now there may be a country or two or an industry or two where -- where that isn't exactly right. But if you take it at a macro level, we are seeing no change in -- in demand in Asia. So if you -- if you now parse that, I would say we are not gaining share like we were earlier in -- in the broader -- in the broader region. We feel very good with where we are in the -- in the Logix area. But we are growing the mid-range, where we now have introduced new products. We have introduced new capabilities. We are attacking a whole new segment of the OEM community. And so what we have to do is be able to spool up and accelerate the momentum in new areas. It is in the process base. It's in the smaller machine builders. And -- and it is with new people.

And so those things, we -- we have skipped a beat, if you will, and -- but we also feel with the advantages that we have, that there is no reason those advantages won't play to our favor in Asia just like they have in other regions of the world. So there is really nothing different there in that perspective. So -- so I would say a lot of this, Jeff, are things under our control and that the fundamental underlying market continues to be strong and just reiterate once again our commitment to -- to be successful in a very important region for our long term -- our long-term future. James mentioned that it was 10%, but our goal is to make that a heck of a lot more as time goes on and that's why we do need to get the organizational design and the maturity process going faster than it currently is.

Just one last quick question. Looking at the $3.45 to $3.65 guidance, the question of share repurchase, obviously, James, embeds some conservatism in that guidance. I guess just from a modeling standpoint, would it be fair for us to assume that you are not after additional share repurchase until we see some Corporate announcement, new authorization, post closing of the deal, or do you have some ability to kind of chip away at share count?

I have some remaining authorization. I have a near-term, what coincides is the closing of the transaction and, of course, board meetings. So I would fully expect that Keith would go and ask for an authorization. So you will -- as we always do, put out a release on the day that the authorization is granted, and so you will know then. But I have some -- I have some left. It's not all gone.

I mean I guess you don't want to tell us how much "some" is though.

It is so some, that I would say you should assume that by the time the deal closes I need to go back and get another authorization.

Okay, thanks a lot.

Thank you.

Your next question comes from the line of Nicole Parent of Credit Suisse, please proceed.

Hi.

Hi, Nicole.

Good morning, Nicole.

I am just trying to get a better handle as we sit here [ technical difficulties ] investments versus additional cost and investment in Asia, which I think you probably lump together, and you cited ERP spending. Could we just maybe get a more clear definition of what you would characterize as growth investments, what the additional costs are, and if you were to give us a better breakout just so we can think about how those things should trail off during 2007 or, in the case of Asia, accelerate.

Let me try and make it -- I know we have used a lot of terms. What we are trying to provide here is a couple of thoughts. Number one, the cost structure of the Company should benefit as you move into the second part of the year. Now if you look at our conversion margins and you look at our gross margins, there is a lot of fixed costs here. SG&A by itself is well over $1 billion. You can see from our conversion margins, which in good times particularly when Architecture & Software is leading the dance, converts at [technical difficulties] but it is a very healthy number. So the fixed cost structure of the Company is high. Certainly SG&A well over $1 billion. What we are really saying is that if you go back in time, you look at the, you will get it when you get the historical information that Tim is going to provide, that gross margins have expanded significantly due to operating leverage and SG&A as a percentage of revenue has started -- has flattened out. But let's face it, I've got SG&A as a percentage of revenue close to 25%.

So what we are saying is we can continue to drive operating leverage, which is expanding growth, and hold the line on SG&A. So I try and turn the debate that way. You have gross investments. You got, your right, we talked about structural cost reduction. We talked about investments in our SAP, but the real way to roll it all together and look at it is I think SG&A as a percentage of revenue can be managed in a way that there is plenty of opportunity in a company with 25 percentage points of revenue tied up in SG&A. That's what we are focused on. Frankly we are looking at G&A, right. We are looking at what all of the processes that we have been talking about for the last year or two involves taking the G&A, both in Europe and now globally, and driving it down and reinvesting that back in selling and growth investments. If we do our job right, you ought to see SG&A go down as a percentage of revenue and we still drive solid revenue growth.

That's the outcome that we ought to simplify and just say we are trying to get done here and look 25 percentage points of revenue is real money to have as a base. We think we have got a lot of runway in continuous improvement to drive the G&A,, that customers don't care about and don't pay for, downward over time and reinvest that surplus in either drop to the bottom-line or reinvestment it in driving revenue growth. That really is about as complex -- we've made it too complex over the years, but that's really what we are trying to do.

Okay. I guess as we think about each of the businesses that we now have in greater detail. You told us Architecture & Software in the U.S. and Europe was up. Can you give us a sense of how much? And Asia-Pacific was down. And then I guess could you give us similar geographic numbers for controlled products?

Yes. Well, I'll put it this way, you got the geographic -- first of all, these two businesses do have some similarities. In other words, when you look at the long-term growth rate that Keith showed you five years, they were about the same. The three -- 13 quarters that I showed you, they were about the same. You can see they are a little bumpy in that you'll have Q4, Q1 seasonality, but what you will find when you look into this thing is over the last year or year and a half, Control Product & Solution began to outperform Architecture & Software. And much of our '07 planning and '07 management is getting a better balance of growth between Architecture & Software and its growth rate versus Control Product & Solution. The -- the fact that Asia was slower affects both of these businesses.

The fact that Europe was stronger affects both of these businesses. They don't look that different, because as Keith said in his remarks, what we sell is a solution that has both Architecture & Software and Control Products & Solutions. So I bet you when you look at our average order, it contains a smattering of both sets. We very seldom book an order where we just have like one part of the Company, one segment but not the other. They really are interrelated. We have just seen more rapid growth in Control Products & Solution, particularly driven by oil and gas, mining aggregate, cement, resource-based stuff. But other than that I think they are very comparable in terms of their geographic growth rates and when you -- when you ship an order it usually has both present in the order.

Right. And I guess just thinking about the Architecture & Software margins, second-highest margins ever versus very rich mix. As we think about that going forward, what are the different -- you cited seasonality. What are other things that we need to be mindful of? And as you look at kind of -- is there any difference between the short cycle or lead time in either one of the businesses?

Okay. No, let me start with the last one because that's the -- . Yes, the Control Product & Solution business, we'll book big orders for some of the drive systems, motor control centers, and those can be big solutions. Those can be big, lumpy, and remember Steve's question, kind of book-to-bill. Architecture & Software is a real book and ship. There is an element of the Control Product & Solution which is a real backlogy -- if we have a backlog, it is in Control Product & Solutions and that, by the way, the backlog is up 15% year-over-year and it would all be in that Control Product & Solution.

Okay.

Now, what you have got to worry about obviously in a quarter like the one we just printed and we are still -- I know we sound a little whiny on automotive, but there is a lot of PLC and Logix that goes into automotive. So when we say rich mix, what we mean is the year ago first quarter had a very solid processor-rich, PLC and Logix rich quarter. And when PLC is down 15% and Logix is only up 11%, you will probably notice it. The average -- the average contribution for Architecture & Software is so far above the average reported, that we are confident that if we manage costs and we drive productivity and we -- we can control the pace of whatever incremental investments are made, you can have reliably higher margin, because we are not worried about the incremental margins, apart from the investments we have made, being somehow dilutive. They are very high. That is why you call it Architecture & Software.

It is really the balancing act between funding growth, getting the results from growth and they are never in the same period. Let's face it. What Keith is saying is that you put money on the cost structure now and you get the benefit about two years. We think now maybe two and a half years later, and it is that out of phaseness that is causing the conversation we are having. If we could -- we can't instantaneously get results from investments we make. It usually takes a couple of years. The good news is the big bulk of investments are coming up on their one and two-year anniversaries and Keith is going to approve more at a time when, I think, we see a better result from the last set. And in the meantime we have some very strong levers, cost structure, productivity, still getting favorable price that allow us to have some flexibility in quarters where you have a little less revenue mix than you might have thought.

Okay. I guess just on price, as you think about it you are getting it. When you think about the businesses what is the outlook for '07 just based on a more sluggish environment and some of the end markets or is it -- ? I guess and then secondarily, when you think about Asia, you said you are not going after share gain. Some would argue, based on the revenue numbers, you are losing share over there now and what is the impact of just price degradation in that region?

Let me try with a global answer on price. The first thing is compared to last couple of years where -- we have had realization positive for the last three-plus years. It -- when you have a slower volume growth, I think you should probably assume -- we have assumed conservatively that your realization will be less. In a good year, it would be a point, point and a half, and in a year that you think is just good, it might be half a percent to a percent, but that's across $5 billion. So that's a -- compared to other businesses I have seen, that's a pretty decent environment. Your point about Asia is a good one. I think it is fair to say we probably have an average selling price a little lower in Asia than we have the rest of the world.

But remember, a lot of our customers can pick off our pricing, they'll notice a difference between Asia, Europe and the United States. So you don't really have like a lost leader geography in this business. You might have slightly lower average selling price in Asia just because it is competitive. Yes, so there are sweet spots as far as pricing is concerned, but in general our customers are starting to have pretty good visibility to our global pricing and everybody else's. You don't get too far out of whack in any one area.

And I guess maybe just flipping to something a bit more positive. When you look at the results in Europe, very strong growth, could you just talk about and maybe compare and contrast what you need to do in Asia with what you've done in Europe and how quickly you think that payback could come through.

With respect to Europe, what we have done there is to really focus what we are working on, both our sales and marketing efforts, and we targeted what we were doing there. Where, quite candidly, we were the least disadvantaged against the -- against the regional leader.And so we targeted segment where technology had an advantage and that could be an advantage that was able to be demonstrated at both OEMs and -- and vertical industries. And certainly the focus and the alignment of the entire organization there, with a much more disciplined selling process, we believe is what has generated growth that we believe is really at about two times what the market growth is, or what you should expect just because business improved. Now what we have learned and what we are taking to Asia is, quite frankly, the discipline consistent process of managing the selling organization and doing it in a -- in a very granular basis.

So we look at it by office -- well, by country, by office, by sales person, and we look at how we -- how are we doing with ramping up with the ability of the new salespeople to be able to achieve what we believe should be the country and or region and in particular country sales revenue per -- per sales person. And so it is really about forcing discipline and consistency in the selling organization while we are dramatically growing it. We have probably doubled the selling organization in a number of countries in Asia over the last 6 to 12 months and so we now need to make sure that we are driving the execution much stronger, much more deliberately and we'll use the same tools that we've -- that we've used in Europe to do that. And that is the -- and we are in that process right now, which is why we are confident that we will improve the performance in Asia and in particular in the developing -- in the developing areas.

Great. And just one last one on the org structure. Who is running each business and how is each business set up, I mean geographically or by sub sector. Is it U.S.-based, European-based, Asian-based? Can you just give us a big -- ?

Sure, the people running the businesses are the same ones that had been running them. Steve Eisenbrown runs the Architecture & Software business. Ted Crandall runs the component and solutions businesses and we run our businesses on -- with a -- with a global P&L. So they are responsible for the performance of that business all around the world, which is how we drive our product businesses and the strategic business units operate underneath -- underneath Steve and Ted, and that way we -- we are able to manage with what you've talked about the -- the differences that exist around the world. They do not impact any one region. There is an owner at the macro level to drive the overall performance. And then we have a global selling and marketing organization that is responsible by region for taking all of the Company's products, services and solutions to market. And they are -- they are targeted for -- for both the OEMs, the verticals, and there was no change in that part of the business.

So the reality is, what you are seeing is the new segments, but really no organization changes that -- that are driving internally in -- in the business today. So really it is business as usual, but some new external reporting and new visibility into the Company, and in particular you are able to now see the transformation of the Company in -- in a much -- in a much more granular nature and you also can understand where we have been making investments with a -- with a much greater certainty. Great, thank you.

Tanya, this is Tim, I need to -- I'm afraid we went very long, so I need to interrupt here. For those of you on the call thank you very much for joining us. We will have out very shortly, probably before lunch time, a document that has a great deal of detail on these two new segments and we are -- stand ready to help you with your historic models. Thank you.

That concludes today's conference call, at this time you may disconnect. Thank you.